16 Jan The e-procurement business case – the devil is in the detail
You’re damned if you do and you’re damned if you don’t. Go into detail that is.
Getting a business case agreed for e-procurement, or for any investment in back office technology for that matter, can be very difficult. The business case itself needn’t be difficult to develop but building the persuasive storyline to accompany it that can successfully stand above competing business cases – that’s the tricky bit. The problem is that if the benefits are expressed at too high a level, their accuracy comes into question – yet if you go into too much detail, your assumptions can be pulled apart.
The benefits case for e-procurement can become very complex or subtle. And the benefits are perceived differently depending on whether you look from a procurement or a finance perspective. A finance person will see e-procurement as a means of generating an electronic purchase order to which an invoice can be matched – hopefully automatically. They see it as the tool to support a “No PO No Pay” policy. Without an effective and easy to use tool to create POs it can be difficult or even impossible to enforce No PO No Pay. It’s easy to see why finance people see these benefits because they relate to their existing business objectives of efficiency and effectiveness. But it’s not as simple as that. Even with an e-procurement tool available, people will still commission work or order goods informally without proper approvals. An e-procurement tool is much more than a means to create a system based PO.
A procurement person may see different benefits. They could for example see catalogues as an opportunity to further refine prices with suppliers and support their strategic sourcing efforts. Many suppliers prefer customers to use their punch-out facilities to automate their orders and will offer a financial incentive for so doing. In some cases where there is no existing system support for purchasing, the introduction of e-procurement and the need for approval prior to purchase could reduce consumption and therefore spend. This all plays to the existing objectives of a procurement function.
These benefits are real and relevant but they can only be quantified if they are supported by detailed assumptions – some of which have a significant margin of error and are therefore open to scrutiny and criticism. But here is a bigger problem in using this set of benefits – they miss the point of what e-procurement is really all about. To build a robust business case for e-procurement we need to go back to basics.
There are three fundamental deliverables of e-procurement: Increased use of existing preferred suppliers and contracts; empowerment of requestors so that they can perform the purchasing process without calling upon specialist procurement people and thirdly, greater compliance to procurement policy by embedding controls in the process.
Quantifying the benefits
Increased use of preferred suppliers
The benefits of increased use of preferred suppliers can be quantified with some accuracy. If you assume that negotiated process are on average 10% lower than list price (and you can use benchmarks to make even more category specific assumption about this) then an increase in compliance to contract of 30% would yield a 3% saving. A more detailed calculation could be based on details spend analysis that identifies where compliance is poor.
Empowerment of requestors
If requestors have to seek advice or approval every time they need to buy something this takes up valuable time of the procurement team. It is relatively easy to estimate the time saved in the procurement team by passing simple transactional work back to requestors. It may be argued that this provides no saving – the same work is done but by different people. But this is wrong. Catalogues allow the automation of the purchasing process and if cost centres and GL codes are automatically associated with products and users, the work required to place catalogue orders becomes trivial. More importantly, requestors are often cheaper than procurement professionals. Ultimately, this benefit manifests itself in fewer procurement professionals managing routine purchasing transactions.
Estimating the benefits of tighter controls is actually somewhat difficult. How much fraud will be prevented if procurement policy is followed more often? It is like measuring the benefits of insurance or a sprinkler system in a warehouse. You hope these products will never be used but you know they are necessary. The potential for loss in not having them is enormous. While there are ways of quantifying this benefit in monetary terms it is a part of the business case that appeals on an emotional level to a decision maker and there are some very clear and persuasive messages that can be built into a business case storyline. An example: “Once you know a loophole is there, can you afford to leave it open? You could be considered culpable if that loophole was exploited at some stage if it was known that you chose not to close it.”
A business case that includes these three benefits and no others can work. It is simple, easy to understand and often compelling. But no two organisations are the same and there are many other reasons to invest in e-procurement. Not all organisations are starting with a blank piece of paper – they may already have high levels of compliance or already have an existing e-procurement system.
Decision makers are all different too. Even the same decision makers can be different depending on the day of the week or when in the financial year the business case is submitted. So, know your audience. Assess the level of detail that is required and deliver that but don’t let the detail obscure the three fundamental benefits of e-procurement. If the business case isn’t detailed enough you could be sent away to rework your calculations but if it misses the fundamentals the benefits case is fundamentally flawed.
Pete Loughlin can be found on twitter @peteloughlin